How to improve PPP projects in India: A Learning from the Past

Posted in Operations & IT Articles, Total Reads: 6455
, Published on 12 October 2011

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The Government of India has now allowed FDI in most infrastructure sectors to the extent of 100 percent. Despite this, PPP in India has not been that successful compared to foreign countries. The article analyses barriers to PPP implementation in Indian Context. Also past case studies are analysed to learn from positives and negative aspects of these examples. These learning when implemented would help India to realize the true potential hidden in Public Private Partnership mode of project implementation.

Learning from case examples of successful and failed PPPs in India

In PPP, each stage has its unique requirements to be successful. The PPP project can fail due to failure in one or more stages in the process. However some PPP projects which did not succeed over the past had one or more prominent faulty stages. Due to this, the failed PPP project set an example of how not to handle these particular stages.

Similarly, there are examples of PPPs, wherein some stages were accomplished brilliantly. And the project set an example of how to accomplish these particular stages. Thus, for each stage and corresponding sub-stages, different PPPs were identified which correctly illustrate how to (or not to) handle these sub-stages. And finally learning was drawn from these examples to understand what will make corresponding sub-stages work better.

In the Timarpur Integrated solid waste management project, important steps such as detailed technical studies, financial and risk evaluation, obtaining regulatory and statutory approvals were undertaken at the project preparation stage itself[i]. The project implementing SPV was also incorporated prior to the launch of the bid. This ensured that the actual project development phase experienced as few hurdles as possible.

Examples of PPPs where problems were encountered

In The Vadodara Halol Toll Road project, estimating the traffic projections for the project, the industrial incentives available for the project area were assumed to continue over the long-term[ii]. However, these incentives were eventually withdrawn resulting in a traffic that was lower than the projected traffic. This resulted in increase in Policy Risk and Revenue Risk.

Learning: Due diligence studies of technical and legal implications are must to ensure the smooth progress of a project through the project life-cycle.Also robust traffic assessments ensure bids submitted by interested private entities are well informed and realistic and the overall capacity proposed for a project is optimum. They also help to mitigate corresponding revenue risks.

b) Procurement

Dealing with Speculative Bids:

Examples of PPPs where problems were encountered

In the Hyderabad Metro project, the government provided commercial development rights for almost 296 acres of land allocated for the depots and the stations[iii]. This opportunity of the utilization of land on a commercial basis along with the metro project led to widely divergent bids from the bidders. Finally the award of this project to Maytas was withdrawn. But such speculative bids exposed the project to the risk of compromising the construction and quality of the metro project. As the private operator would have had a greater incentive to complete the real estate development at the cost of the metro.

Learning:While speculative bids should ideally be avoided, if encountered, the public entity should deal with them without jeopardizing the long term prospects of the project. This could even mean terminating and re-launching the bid process.

Importance of Lead Consortium Member/Promoter of Concessionaire:

Examples of PPPs where problems were encountered

In the Hyderabad Metro project the winning consortium of Maytas Metro was badly affected due to the issues faced by its promoter – Satyam Computer Services. Although the project was to be implemented by a separate SPV, there was a loss of investor confidence within the promoters of the project. And eventually, the project failed to achieve financial closure. The government finally had to withdraw its award and re-launch the bid process.

Learning: The experience and expertise of the lead consortium member or promoter signifies the concessionaire’s ability to undertake complex projects. Therefore, there should adequate due diligence in contractually ensuring backing of the concessionaire by the promoter and the continued involvement of the lead member, at least during the project development stage.

c) Development

Handling of Land Acquisition :

Examples of Successful PPPs

In the Hyderabad Metro project the government had to handover land to the concessionaire by the financial closure date. Moreover, 90% [iv]of the land had to be handed-over within 120 days from signing of the agreement. To ensure greater planning and focused efforts on land acquisition by the government; penalties were built in to the contract in case the government delayed the delivery of the land. To reduce the risk further, the project intended to use government lands to the possible extent.

Examples of PPPs where problems were encountered

In the Delhi Gurgaon expressway project prior to actually acquiring the land, the government committed to the promoters for providing a substantial area of land. But there were certain areas of land that were difficult to acquire, due to the thickly populated surrounding areas of the expressway. This exposed the government to the risk of not providing the land within reasonable time, thus impacting the overall schedule of the project.

Learning: It would have been better if uncontrollable risks such as the one incurred above, were addressed before the project procurement stage itself to ensure smooth functioning of the project. This could have been achieved by completing the land acquisition process prior to the project procurement process itself.

Streamlining of Approvals & Clearances:

Examples of Successful PPPs

In the Alandur Sewerage Project [v]the Alandur Municipality took up the responsibility for key approvals, including road cutting, shifting of services and environmental clearances. The developer was responsible only of the ‘works’ related approvals. This approach ensured there was minimum delay in obtaining the necessary permits.

Learning: There should be a single interface for interactions or coordination on all such approvals to be setup by the government to prevent ensuing delays. This could be in the form of a lead entity OR a common project steering/ empowered committee taking up the responsibility of all such formalities. With this, the concessionaire could focus on the core development issues rather than being entangled in administrative processes.

Environmentally and Socially responsive development framework:

Examples of Successful PPPs to be emulated

In The Vadodara Halol Toll Road project, from the environmental and social assessment of the project it was concluded that the project would lead to resettlement and rehabilitation of about 300 families. Thus, to develop different alternatives, intense public consultations were carried out. Moreover Bypasses were introduced at various critical locations. As a result the extent of resettlement was reduced to only 10 project affected households.

Learning: Since most of Infrastructure projects have significant social and environmental impacts; it is necessary that PPPs have an environmentally and socially responsive development framework. Social and environment impact assessments are mandatory in this regard. This framework would also help in gathering public support for a PPP project.

Financing Innovations:

Examples of PPPs to be emulated

The Vadodara Halol Toll Road was another project that utilized several financing methods such as deep discount bonds with an option of take-out financing, cumulative convertible preference shares and long term loans as a part of its financing structure.

Learning: It is important for PPP projects to be financially independent to the extent possible and minimize reliance on government grants or schemes. This is possible through innovative financing structures. They not only bring down the cost of funds but also tap new sources of funding. However, care should be taken to ensure that such innovations in financing do not result in speculative bids during the Procurement stage. Also Since real estate market is very volatile and cyclical in nature; real estate development should be a smaller component of the project or alternatively should be separated from the core infrastructure project.

d) Operations

Favourable Operating Environment:

Examples of Successful PPP

In the Amritsar Inter-state Bus Terminal project[vi], the government issued notifications to the effect that all intercity buses would be required to pickup and drop off passengers at the new Inter City Bus Terminal. This effectively reduced the concessionaire’s revenue risk.

Learning: Since by nature PPP projects require the private sector to operate in a public dominated space, it is important to create a favourable operating environment for the private sector to function optimally.

Resolution of Issues through Mutual Discussions:

In PPP Projects there is always a likelihood of issues cropping up from time to time between the government and the public agency. Contracts merely specify the formal mechanism to deal with such issues. But in some cases solutions can only be identified through mutual discussions carried out in good faith.